What is Bitcoin?

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What is Bitcoin?

So, What Exactly is Bitcoin?

Bitcoin breaks down into two distinct components, a blockchain protocol and a cryptocurrency, the first usable examples of both, designed to facilitate transactions in a peer-to-peer, decentralized manner. The cryptocurrency Bitcoin is a portion of code that represents an immutable digital token, similar to a digital gold coin that could be instantly broken down and transacted within one hundred millionths of a unit. The Bitcoin protocol, or the blockchain infrastructure that makes these transactions possible, is a decentralized record-keeping system that maintains the entire ledger of the network since its inception. Both iterations would be correctly referred to as Bitcoin.

Who Invented Bitcoin?

This question is a lot trickier than it seems on the surface, as we do not know who the inventor or inventors of Bitcoin are. All we know about the creator(s) of Bitcoin is that it was pseudonymously invented by an entity known as Satoshi Nakomoto. No one knows if Satoshi Nakomoto is a single person or a group of people, and we haven’t heard from them since the inception of the Bitcoin network. As a distributed network with no single point of authority, it seems the creator(s) did not want to have undue control or influence on the network.

Why Was it Created?

There have been concepts of a digital currency previous to Bitcoin, but Bitcoin was the first successful iteration of this concept with the use of blockchain technology. Satoshi Nakomoto created Bitcoin on the back of the financial corruption and ineptitude following the 2008 global financial crisis. The subprime mortgage crisis of 2008 led to a government bailout of $700 billion that not everyone agreed to, but everyone was impacted by it. Satoshi wanted to create a solution where people have democratic control over their value, not a Federal Reserve who can arbitrarily increase inflation or interest rates at a whim.

Satoshi wanted to create an immutable currency with a pre-determined inflation rate, this means the market couldn’t be surprisingly affected by the decisions of the ruling authority, something that was previously unheard of and impossible. To drive home the importance of controlling one’s value, especially in regards to inflation, Satoshi symbolically embedded the 2008 Times of London headline reading “Chancellor on brink of second bailout for banks” into the first block of the Bitcoin blockchain. Besides this predetermined rate, Satoshi Nakomoto did not think a central authority should have full decision making power over a financial system, so he created Bitcoin to give authority to everyone proportionally to how much they contribute to validating the network’s transactions. Since every global currency is no longer backed by gold, but by fiat, Satoshi wanted to create a system with values that return the authority to the individual users

How is Bitcoin Different from Traditional Currencies?

Bitcoin VS Fiat

Besides what is stated above, many other factors make Bitcoin very different from traditional fiat currencies. Along with being decentralized and immutable, Bitcoin as a currency is also:

• anonymous

• highly divisible

• highly portable

We will now break down how each of these factors affects Bitcoin as a tool to store and transfer value.

Decentralization

The Bitcoin network is fully decentralized, no authority, organization, or entity can single-handedly decide the outcome or rules of the Bitcoin blockchain, it must be voted on the community. This is vastly different than any government mandated currency, as the government has full say and control over their fiscal policy. In dire situations, we have seen corrupt governments inflate their currency so high that it becomes practically valueless, sometimes erasing decades or generations of accumulated wealth. Satoshi Nakomoto wanted to create an alternative to this system, and that is where the creation of Bitcoin started.

Anonymity

With any physical currency, there is no way to track how much money is spent or for what. For example, if you have a dollar bill and spend it on a candy bar, it is impossible to use that bill to trace back the candy bar purchase to you, it is an untraceable transfer of value. Since bitcoin is a decentralized and distributed ledger where all records are public, all Bitcoin storage addresses are anonymous so you cannot be traced. Based on your transactional habits and the people you send Bitcoin to, your Bitcoin address could eventually be deduced, but nothing is connecting a person to their address, and you can create as many addresses as you want to increase your anonymity.

High Divisibility

When many first timers want to purchase a Bitcoin, some are dissuaded because they think they have to purchase an entire Bitcoin to be able to get involved. This is not true, and Bitcoin was specifically designed so this would never be a problem. Each Bitcoin is divisible into one hundred millionth of a unit, known as a satoshi. A satoshi represents 0.000000001 of a Bitcoin, or approximately $0.000006984 U.S. Dollars. This means users can use Bitcoin on any sized transaction from a couple of cents to billions of dollars.

Portability

Unlike any physical store of value like fiat currency or gold, Bitcoin is digital, making it exceptionally easy to transport. Since Bitcoin is a digital representation of value and all you need to access your Bitcoins is your private key, it is extremely easy to transfer them. Many people choose to store their Bitcoin on an encrypted flash drive, digital wallet applications such as Coinbase or Electrum, or paper wallets that represent the private key to access the Bitcoin. This means that you can cross the entire globe with billions of dollars of Bitcoin with just a flash drive in your pocket, or even less. Imagine trying to get the equivalent amount of physical currency through an airport; it’d be essentially impossible.

Bitcoin and Blockchain

Many people can be confused between the differences between Bitcoin and blockchain, and that is very understandable when just starting. Blockchain is the technological infrastructure that allows the Bitcoin network to exist and complete transactions. Bitcoin utilizes blockchain protocols to create a network that supports its decentralized, peer-to-peer transactions. This means that Bitcoin is blockchain, but blockchain is NOT Bitcoin.

Blockchain encompasses Bitcoin as an example of what the technology can enable, but Bitcoin as a whole is not the entirety of blockchain technology. There are many other decentralized blockchain networks, although not nearly as big as Bitcoin, such as Ethereum and USDT. These different networks offer similar or differing services and capabilities than Bitcoin, but are not technically associated with the Bitcoin network in any way. These are also blockchain networks, showing the importance of differentiating between Bitcoin and blockchain as a whole. Cryptocurrencies are also an aspect of blockchain networks, as they are the financial incentive used to reward validators for honestly maintaining the network, but they also do not represent all of blockchain technology, just a portion of it.

A Bitcoin

Is Bitcoin Legal?

Bitcoin was created so that no governing body would be able to shut down the network or block transactions. Although this means that transactions can’t technically be impeded on, they could still be made illegal by regulating bodies. Bitcoin is 100% legal as a store and transfer of value, but the way it is viewed as an asset varies depending on jurisdiction. Some countries, such as the United States, view bitcoin as a capital asset, meaning every transaction is taxed, while countries such as Singapore tax the buying and selling of Bitcoin as if it were income. Bitcoin is legal as any other financial asset, but make sure you know your local laws and regulations.

Where Can You Buy Bitcoin?

There are many ways to buy Bitcoin, the three most common are via cryptocurrency exchanges such as Binance, or Coinbase, buying it from another Bitcoin owner through a marketplace like LocalBitcoins, or purchasing it using a Bitcoin ATM. Different methods will cost you different fees and take different amounts of time depending on your preference, but all are very safe and secure as long as you know what you are doing.

Buying Bitcoin Online

Buying Bitcoin online is extremely easy and is the most common way people use to purchase cryptocurrency. When buying Bitcoin online, you need to purchase it using a credit card, debit card, or bank account on a regulated exchange. Since you will be transaction fiat for Bitcoin, there are stringent financial regulations that each exchange must uphold to complete this process. The rules will vary depending on the laws of your jurisdiction, but generally, it is a very simple process.

Once you have signed up and registered for your exchange of choice, you will have the opportunity to purchase however much Bitcoin you would like at the current market value. You can also use these exchanges to sell back your Bitcoin for fiat currency, so these exchanges are very useful whether you are buying or selling. 

Buying Bitcoin with Cash

The second most popular option for exchanging Bitcoins and currency is to do the transaction directly for cash. This method works the same way any traditional sale would; the buyer and seller agree on a price and an amount, and then the assets are exchanged. This is usually done in person through a connection commonly found on peer-to-peer or “local” marketplaces. These marketplaces will connect you to viable buyers or sellers in your area depending on your needs.

Although this method is generally very safe, you have to be careful when you are doing local exchanges. Most of the time it is honest people that simply want to buy or sell, but there are many scammers or even thieves that will try to take advantage of new or even experienced users. Before you ever do a Bitcoin transaction with cash, make sure it is handled in a very public place with others around you and that you do not give over the money until the Bitcoin is 100% confirmed in your address.

What Can You Buy With Bitcoin?

I actually think a more fitting question is what can’t you buy with Bitcoin? As a peer-to-peer decentralized currency, you can purchase absolutely anything with Bitcoin as long as the vendor is willing to accept it. This can range anywhere from a bottle of water to a house. Now, this is where it gets a little tricky, as currently, most people do not understand what Bitcoin is or why they would accept it over fiat currency, so many vendors simply will not accept it. However, this is rapidly changing, and there are massive companies such as Microsoft, Overstock, and AT&T that accept Bitcoin payments. Microsoft currently only offers Bitcoin purchases to top up accounts, but that could change in the future.

A lot of merchants want to accept Bitcoin as payment but do not want to hold it long term as it is still too volatile. If a store sells something for $20 worth of Bitcoin and 4 days later it is only worth $15, it is not a viable store of value for a vendor that depends on maintaining margins. Fortunately, companies such as BitPay were created to handle this exact problem for vendors. With these types of payment processors, vendors can accept Bitcoin and then have it automatically exchanged for their local currency, meaning they can accept Bitcoin as payment without having to worry about its volatility. As Bitcoin becomes a more mainstream tool to store and transfer value, we should continue to see more vendors accept this type of payment. Even if the vendor doesn’t explicitly state whether they accept Bitcoin, it never hurts to ask!

Selling Your Bitcoin

Bitcoin Selling

Just like with buying Bitcoin, it is very easy and accessible to sell your Bitcoin. You have the same options when it comes to selling as buying – through an exchange, peer-to-peer, or a Bitcoin ATM. Generally, I would recommend selling your Bitcoin in the same method that you bought it, as you most likely have the greatest understanding of how this system will work compared to your alternatives.

If you’ve decided that would like to sell your Bitcoin, there are 10s of billions of dollars of liquidity and interested buyers all over the world. The simplest option would be for you to log on to whatever exchange you used to purchase and sell it directly on the open market. You also have the option to sell it to friends, family, a third party, or anyone willing to make a deal with you at your determined price, although this will probably take more time and effort than selling on an exchange, but will also cost you less in transaction and processing fees. You can also sell your Bitcoin directly for cash with a Bitcoin ATM, but they tend to charge exuberant rates to justify their services.

Is Bitcoin Available Worldwide?

As a distributed and decentralized currency, one of the main focuses of Bitcoin is the permissionless nature of its transactions. This means that no entity, no matter how powerful, can technically stop the transaction from taking place. This function was created so no governing authority would be able to shut down the network, but luckily no government has taken the steps to try to do so (although some have certainly threatened too). Currently, there is no law worldwide that would make either owning, using, or trading Bitcoin illegal, but Bitcoin was created so even if it was deemed illegal, it couldn’t be affected. The only way to destroy and affect the network is to convince people to stop using it (whether by coercion or force), but that wouldn’t stop the viability of being able to use and store Bitcoin anywhere across the globe.

How Safe Is Bitcoin?

With over $130 billion of value tied up in Bitcoin, hacking the Bitcoin blockchain would net hackers the largest reward in the history of humanity. This financial motivator means that the Bitcoin network has been relentlessly attacked by the top hackers in the world who are trying to unlock the implicit and invested value of the network. This has been going on since the creation of the Bitcoin network, and thanks to Bitcoin’s cryptographic security, it is a rather difficult feat to achieve.

Although the Bitcoin network is extremely safe, that does not mean that every exchange is safe. If a hacker can gain access to users’ private keys stored on an exchange, that means they will be able to steal and access their Bitcoin. This type of robbery would be likened to a robber going into a bank and stealing from the vault, while hacking the Bitcoin blockchain would be like hacking into the Federal Reserve in order to gain control over the monetary system.

How to Store Your Bitcoin

Storing your Bitcoin is possibly the most important concept you need to understand before you get started; if you do not understand your storage options and how they work, you are much more likely to lose access to your Bitcoin. There are 2 options when storing cryptocurrencies, one option that has no contact with the internet, making it more secure, known as a cold wallet, and one that is connected to the internet known as a hot wallet. Both storage methods are very useful depending on your needs and future uses of your Bitcoin, but it’s very important to understand the difference.

Cold Wallets

Cold wallets are the most secure digital wallets you can use to store your Bitcoin. This is because cold wallets utilize a method known as cold storage, meaning your wallet’s private keys, or the access password to your wallet, are not stored on the internet. This lack of exposure is a massive safety feature, as your private keys will have to be on the internet to allow hackers to comprise your wallet.

There are two types of cold wallets, hardware wallets and paper wallets. Hardware wallets, such as the Nano Ledger S or Trezor, are removable USB cold storage devices. They are more expensive than a paper wallet but offer the best mixture of security and usability.

You can also generate your own paper wallet, an offline piece of paper with your private keys or QR code inscribed. It’s even possible to memorize your private key so there is no physical evidence to be compromised. Make sure you are careful; if you lose or forget your private keys your wallet access is gone forever.

Hot Wallets

Although not as secure as cold wallets, hot wallets are a very secure way to store your Bitcoin or other cryptocurrencies. The main difference is security and accessibility, because with hot wallets your private keys will always be online. A hot wallet can be any digital wallet connected to the internet, such as a wallet on an exchange. In the instance of an exchange, since you do not have control over your private keys, if they are hacked and your private keys are stolen then you will lose all your Bitcoin.

This is why it is very important to try and store your cryptocurrency on the most secure wallets possible, preferably in cold storage. One major advantage of hot wallets, especially exchange wallets, is that you can complete sales of Bitcoin faster, since you do not need to first transfer it from cold storage. If you are selling or spending your Bitcoin, it’s best to spread it between both hot and cold wallets.

Further Ways to Protect Your Bitcoin

The best way to keep your Bitcoin secure is to have the least amount of accessibility to your private keys as possible. Since the safety of your funds in the wallet depends on the safety of these keys, it’s best to split up your funds between wallets. You can use one hot wallet for spending Bitcoin, another hot wallet for trading Bitcoin, and a cold wallet for saving your Bitcoin. The two hot wallets you can keep more immediate access to, while your cold wallet can go into your home safe or your local safety deposit box.

Major Advantages of Bitcoin

Bitcoin has become such a successful alternative to fiat currency and gold as a store and transfer of value because of so many of its unique attributes that no other assets possess. It is decentralized, anonymous, immutable, and accessible with absolutely zero restrictions. It can be sent around the world almost instantaneously without being controlled or having to go through a third party intermediary. For citizens that live under corrupt regimes, this means they can now take control over their value and take the power away from the governing financial authoritarians. After the 2008 crash, Satoshi Nakomoto knew it was time to create an alternative system.

Some Disadvantages

Although Bitcoin is an undoubtedly revolutionary technology, it still has some drawbacks. As a distributed ledger, it is much slower than a traditional database because all the information needs to be shared and validated by every validating party instead of a central authority. In its current iteration, it is still hard to instantly transact with Bitcoin because it is not nearly as fast as using a card or cash. On top of that, Bitcoin is still an extremely new and comparatively unused technology, so it is very hard for average consumers to utilize Bitcoin without some sort of technical background. This makes Bitcoin inaccessible to many, so even if it has benefits over fiat currency, it can not always be put in the hands of people who need it.

Concluding Thoughts

All in all, this is the first time that regular people can have full control over the value they’ve earned since the abolition of the gold standard. It is still a very new technology, but is already establishing itself as a major financial asset class, and is continuing to grow its user base and usability day by day, even amongst global uncertainty. Bitcoin still has a long way to go until it reaches genuine mainstream adoption, but it is setting an incredible path towards future global usage.

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